The use and disuse of FinTech credit: When buy-now-pay-later meets credit reporting

Consumers significantly reduce BNPL usage when the BNPL lender becomes subject to credit reporting regulation, according to a new BIS Working Paper.

Focus

Non-bank lenders that use innovative technologies to improve the delivery of financial services have significantly promoted financial inclusion. However, these fintech lenders often do not share information about their lending with other creditors. This makes their lending practices opaque and potentially leads to a build-up of credit risk outside the regulatory framework.

A prominent example is the „buy now, pay later” (BNPL) industry. BNPL constitutes an increasingly large fraction of the consumer credit market, but few countries have implemented credit reporting requirements for BNPL. This raises an important yet unexplored empirical question about whether credit reporting can help reduce the overborrowing risks associated with BNPL.

Contribution

The authors of the report analyse the impact of reporting requirements on BNPL credit usage. They assemble a unique data set of 200,000 randomly selected BNPL users from Huabei, China’s largest BNPL lender. The authors use this data set to assess the impact of a significant regulatory change in China in 2021, when Huabei was incorporated into the national credit registry. To supplement these results, they conduct a survey on a major big tech platform to gauge BNPL users’ attitudes towards credit reporting.

Findings

We find that credit reporting regulation significantly reduces consumers’ usage of BNPL credit. On average, consumers reduced their use of BNPL for purchases by 14% relative to the pre-regulation period. Both extensive and intensive margins drive this decline in BNPL usage. Compared with users who never defaulted, BNPL users with default records reduced their BNPL usage to a larger extent.

The credit reporting regulation also impacted the adoption of BNPL credit by new users. Since the regulation’s enactment, new users have been older, have more experience making online payments and take longer to adopt BNPL credit compared with those who adopted BNPL before the regulation.

Consistent with our regression results, the survey data show that worries about BNPL’s negative impact on credit records rank among consumers’ top reasons for not using Huabei. Survey respondents who previously defaulted are more likely to „reduce Huabei usage” after the introduction of the credit reporting regulation.

Conclusion

Consumers significantly reduce BNPL usage when the BNPL lender becomes subject to credit reporting regulation. This reduction is particularly pronounced among borrowers with default histories, who also show improved repayment behaviors compared to those without such records. The decrease in BNPL usage also leads to a reduction in online consumption, supporting the financial constraint hypothesis.

„Our findings indicate that information sharing can help mitigate overborrowing and overspending, with stronger effects seen among younger borrowers, those who previously spent more, or those with credit cards. We also highlight the synergies between BNPL lending and Big Tech platforms’ ecosystems, which imperfectly substitute for formal enforcement institutions.” – said the authors.